FEDERAL TRADE COMMISSION v. VERITY INTERNATIONAL

The opinion of the court was delivered by: Lewis A. Kaplan, United States District Judge.

MEMORANDUM OPINION

This is a motion to hold defendants Verity International, Ltd.
("Verity"), Robert Green and Marilyn Shein in civil contempt of court for
failing to comply with the preliminary injunction previously entered in
this action.*fn1 There are no issues of fact.

I

This is an action by the FTC against, insofar as is relevant to this
motion, the operators of a billing service for Internet pornographers.
The general nature of the action and the claims asserted here are set
forth in the Court's opinion granting the plaintiff's motion for a
preliminary injunction, familiarity with which is assumed.*fn2

Among the forms of relief the FTC sought in its motion for a
preliminary injunction were an asset freeze and a direction that
defendants Verity, Green and Shein, all of whom are foreigners, provide
full and truthful disclosure of their financial condition. While these
defendants contested the propriety of a preliminary injunction in general
and the necessity for a freeze order in particular, they did not
otherwise resist the FTC's request for an order requiring disclosure of
their financial condition. Indeed, when the Court ruled in the
Commission's favor, it directed that the Commission serve a proposed form
of order and afforded these defendants the opportunity to respond. When
these defendants responded to the FTC's proposed
form of order, which
contained financial disclosure provisions, with their own proposed form,
they essentially adopted the Commission's form on these points.

As defendants concede, a finding of contempt is appropriate if there
was a clear and valid order and defendants, knowing of the order, failed
to comply and made no diligent effort to do so.*fn5 As Green and Shein
further concede, these requirements, with two minor quibbles, have been
satisfied here. Certainly defendants knew of the order and deliberately
made no effort to comply with it. Indeed, Green and Shein have submitted
declarations acknowledging that there is no legal excuse for their
failure to comply. Nevertheless, their counsel has advanced two arguments
in opposition to holding them in contempt.

A. Validity of the Order

In most circumstances, the validity of an order is not an appropriate
consideration on a contempt motion, as a court order ordinarily must be
obeyed unless and until it is reversed or vacated. The only exceptions
are where the order exceeds the court's jurisdiction or is "transparently
invalid."*fn6 Moreover, an alleged contemnor will not be heard to allege
even the transparent invalidity of a court order unless the defendant has
made "some good faith effort to seek emergency relief from the appellate
court" or shown compelling circumstances such as a need for immediate
action.*fn7 Nevertheless, Green and Shein contend that Section III.E, which
required them to provide the FTC with consents allowing the Commission to
access their foreign bank records, and Section V, which required the
submission of financial statements, are transparently invalid because the
forms attached to the injunction wrongly would have required them to
attest that the forms were executed voluntarily rather than pursuant to
court order.*fn8 The argument is utterly without merit.

To begin, there is every reason to conclude that the forms would have
been executed voluntarily. The FTC proposed an injunction requiring the
execution of these forms. Green and Shein not only did not object to that
aspect of the order, they incorporated it into the form of order that
they proposed to the Court.*fn9 But there is no need to rely on this, as
their position must be rejected on other grounds.

In this case there was nothing stopping Green and Shein from raising
their objection to the wording of the form of consent and of the
financial statements. Their contention that they could not object earlier
because they lacked counsel is without merit. The Court's opinion
inviting proposed forms of the preliminary injunction was issued on
December 13, 2000, more than a month before defendants fired the second
firm that represented them.*fn10 In fact, defendants did respond and
object to other aspects of the order in their December 21 submission.
Even if they had lacked counsel earlier than in fact was the case, it
would be difficult to see why defendants, having voluntarily discharged
their counsel,*fn11 should be heard to claim that they were prevented by
their own act from objecting to the order. Nor was there any need for
immediate action. Instead, Green and Shein simply decided to ignore the
Court's order. Thus, the collateral bar doctrine forecloses them from
contesting its validity.

B. Vagueness

Green and Shein argue also that Section III.E of the preliminary
injunction is insufficiently definite to justify a contempt finding
because it fixed no date certain by which they were obliged to provide
the consent forms. The argument is disingenuous given their persistent
refusal to comply with demands for the forms and the passage of months
since the entry of the order, not to mention their acknowledgment that
there is "no legal excuse" for their admitted "disobedience." But it is
unnecessary to rely on Section III.E because Section V did provide a
deadline. The financial statements there required were to have been
submitted within 21 days after entry of the preliminary injunction, which
occurred on January 4, 2001.

"In determining the sanction appropriate for a
contempt, the Court must consider `(1) the character
and magnitude of the harm threatened by the continued
contumacy, (2) the probable effectiveness of the
sanction in bringing about compliance, and (3) the
contemnor's financial resources and the consequent
seriousness of the sanction's burden.'"*fn13

Here there is little question that the contemnors' brazen refusal to
comply with Section V of the preliminary injunction threatens serious
harm. They or their associates have derived millions of dollars from the
United States, a material part of it, at least, by what the Court
preliminarily has determined probably was a substantial consumer fraud.
The consumer redress that potentially could be required in this case is
large. The contemnors may have substantial assets within the United
States available for that purpose, not to mention assets abroad that
might be reached. Indeed, they have about $1.3 million frozen in an
account here controlled by defendant Integretel, Inc. and may have an
interest in another $5.7 million in the hands of AT&T. By withholding
financial statements, Green and Shein quite deliberately and willfully
are attempting to thwart efforts by the FTC to ensure that funds are
available to remedy the harm they allegedly have done.

Turning to the second prong of the standard, Green and Shein assert
that they will not comply with the Court's order in any event and have
the unmitigated gall to argue that no coercive fine should be imposed
because it therefore would be ineffective. In so doing, they misconstrue
the relevant consideration. Courts consider the likely effect of a
proposed sanction in promoting compliance in order to avoid imposing a
sanction too small to secure the desired result or so large as to be
unnecessarily harsh. These objects do not require courts to decline to
impose coercive sanctions simply because the contemnor asserts that it
will not comply irrespective of what the Court may do. Indeed, the
argument put forward by Green and Shein simply makes clear that all
doubts in this case as to the sufficiency of any given proposed fine must
be resolved against them in light of their obduracy.

Finally, the Court is obliged, in the ordinary case, to consider the
contemnor's resources. Here, however, the contemnors have made that
impossible — the contempt consists of their refusal to provide that
information to the Court. The only indications before the Court are that
there is $1.3 million of their money frozen at Integretel and that they
appear to own all or substantial shares of at least two profitable firms.
Whatever the details, they obviously are persons of very substantial
means.

An order of civil commitment is entirely appropriate here. The contempt
of Green and Shein is deliberate, calculated and willful. Their
contention that they would be unlikely to enter the United States while
the contempt matter is outstanding, moreover, would not necessarily make
such an order futile. Contemnors are international business people of
means with business interests in the United States. While they may be
able to remain outside the country for a long period in order to avoid
arrest, it seems likely that such conduct would interfere with their
ability to manage their United States interests and otherwise give them
an incentive to comply with the Court's order. In any case, it is
entirely appropriate to view an order of arrest directed to a foreign
contemnor as the practical equivalent of an order preventing the
contemnor from entering the United States until the contemnor complies
with the Court order, which in the case of these individuals is an
entirely appropriate coercive measure. Thus, an order of civil commitment
has some promise of coercing compliance in this case, contemnors' denials
notwithstanding. Certainly this case is quite different from Spectacular
Venture, L.P.,*fn14 upon which contemnors rely, where the Court declined
an order of civil commitment on the ground of apparent futility. The
contemnor there was an older and seriously ill man with no foreseeable
reason to come within the Court's jurisdiction.*fn15

Accordingly, the Court will order the arrest of Green and Shein,
wherever they may be found within the jurisdiction of the United States,
and their incarceration in this District pending their full and complete
compliance with Section V of the preliminary injunction.

III

The Court is mindful of the contemnors' current feeling that the order
is unduly intrusive. They were given ample opportunity to advance that
view to the Court before the order was entered, a course they did not
take, and even now belatedly seek modification of the order, as is their
right. But they are not entitled simply to disobey it. Down that path
lies anarchy.

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